The plan is that 109bn Euros will be provided via EU backed loans, with a further 37bn Euros coming from private investors holding Greek bonds – the much debated haircut which we have heard such a lot about recently. The EU barbers will offer investors a choice of four hairstyles, none of them flattering. Three will involve swapping existing bonds for new ones with longer maturities and lower interest rates while the fourth option will simply be to rollover bonds for another term as they mature.
There will also be a bond buyback programme, which will involve bondholders selling their bonds at reduced rates. The net effect if all goes according to plan will be a 21% reduction in the value of Greek bonds held by private investors – more of a serious trim than a real scalping, but pretty significant nonetheless. Not least because it represents another big political win for German Chancellor Angela Merkel, who has been running rings round French premier Nicolas Sarkozy in these negotiations.
Markets across Europe rallied strongly on the news, and the shares of banks exposed to Greek debt got a boost. Meanwhile yields on Italian and Spanish bonds – which had triggered the crisis talks in the first place by rising alarmingly – softened significantly.
So, job done then? Well, not quite. The immediate crisis may have been averted but whether enough has been done even to tackle the Greek problem, never mind the troubles of the rest of the Eurozone, remains to be seen. Having been bailed out twice in such short order, the commitment of the Greek people to the kind of austerity measures required to really get the country back on track has to be doubtful (especially as the package also refers to EU support for the Greek government until it can return to the financial markets, which could take years).
The fact that investors will lose money will also be interpreted – rightly - by the rating agencies as a default, albeit only a selective one. The economics may be challenging but politically it should boost the Franco-German agenda. Never waste a good crisis as they say.
And once again, although the spotlight is on Greece, perhaps the most significant structural shift announced is to be found elsewhere. The beefing up of the EFSM (European Financial Stability Mechanism) to allow it to provide pre-bailout financial support is clearly aimed at easing the pressure on the much more strategic economies of Italy, Spain, Portugal and Ireland. The 64 dollar (or 146Bn Euro) question remains however – will it work?